EU: French Signal On Budget Overrun May Pose Threat To Harmony

May 16, 2002 00:00 GMT

By Breffni O'Rourke

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EU: French Signal On Budget Overrun May Pose Threat To Harmony

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France has signaled it may not meet its obligation to bring its budget to a position of near-balance by 2004, as required by the European Union's economic stability pact. The signal comes in the wake of the French government's pledge to cut taxes, which will reduce national revenues. But such a breach may further undermine the credibility of the pact, which is already under pressure because of current or prospective budget overruns in Germany and Italy.

Prague, 16 May 2002 (RFE/RL) -- France says it is considering breaching its commitment, made under the European Union's stability pact, to achieve a balanced budget within the next few years.

If it does so, it will be the latest EU member to have trouble meeting various terms of the stability pact. Analysts say this could lead to growing resentment -- particularly among the smaller EU states which have made economic sacrifices to conform to the pact.

The budget minister in France's new government, Alain Lambert, says France will formally consult with its EU partners with the intention of gaining their approval for a modification of France's pledge. At present, the terms of the pact require euro-zone members to bring their public finances close to balance by the end of 2004.

The director of the Brussels-based European Policy Centre, John Palmer, explains, "It is a subsidiary target within the stability pact -- namely, that there should be budget balance over the business cycle -- and France is proposing to achieve budget balance over a longer period than the [original] target date."

Instead of 2004, France is considering putting the date back to 2007. Palmer says this is not of key importance in itself. But it would be a new dent in the pact, which already suffered a setback in February. At that time, Germany and Portugal managed to flout the rules that require a formal warning to be issued to those countries approaching the limits set for overall budget deficit. The European Commission withheld the warnings in the face of strong German objections.

Adding to the inconsistency is the fact that small EU member Ireland was warned last year -- though on different grounds -- and strongly resented that warning.

In Brussels, a spokesman for EU Commissioner for Economic Affairs Pedro Solbes has emphasized that meeting the 2004 timetable is "very important" for all the member states grappling with budgetary setbacks. The spokesman, Gerasimos Thomas, said: "We don't take positions vis-a-vis individual countries, but we insist that all countries respect the commitments that they made in Barcelona -- to balance their budgets, at the latest, by 2004."

Thomas said the commission's position is that the four countries which have not yet reached budgetary consolidation -- France, Germany, Italy, and Portugal -- should do so by the due date. He said the commission has so far received no formal notification of a change in France's original commitment, and that in any case such a move would require the approval of a majority of union partners -- something he sees as unlikely.

It's notable that three of those four countries are big member states -- in fact, the three biggest. Because the "big three" are having trouble meeting the various terms of the pact, the remaining, smaller states are likely to question the need for them stick to its stringent requirements. As analyst Palmer puts it: "I think there will be some feeling [among the smaller countries] that the larger countries are in a position to renegotiate the small print of some of these agreements, or so some people believe, and I think there is some justice to that [feeling]."

However, Deutsche Bank financial analyst Stefan Schneider does not see the French move as likely to have any impact on the financial markets, or on the value of the euro common currency: "For the financial markets it has become clear that the stability pact will not be fulfilled in all the nitty-gritty details which are printed on paper, and that there is some leeway in terms of interpretation."

Schneider notes that the euro did not drop in February at the height of the dispute between the EU Commission and Berlin over whether to censure Germany. And, he continues: "I don't think that anyone -- well, let's rather say the majority in the financial markets -- really believes that the stability pact will be implemented like law. It is a statement of intention, and they [the EU members] will try to fulfill it wherever they have an economic tailwind, but won't feel completely obliged to fulfill if they have headwinds."

However, in Paris, former Finance Minister Laurent Fabius has said he is concerned that bigger deficits could mean higher interest rates for the euro, which he said could damage efforts to create more jobs.